Early October has whipsawed the feel-good US stock market which has been the story for much of 2018. An 800+ point drop in the Dow on Wednesday, October 10th offered an exclamation point to investor jitters.
So, what’s going on? How should you react? Here are our thoughts on the recent investment jolt.
• Rising interest rates – a new regime? Interest rates have marched higher for most of the last twelve months. This has resulted in a return to yield in things like cash, higher borrowing costs, and most recently, some market jitters. Good news, a healthy economy, can sometimes result in bad reactions in markets as investors consider the implications a world with yield.
• Reversion to the mean? While the US market has been go-go reaching new heights recently, the rest of the world has wallowed with the pain of trade wars adding insult to injury. Perhaps the US market got ahead of itself with its exceptionally strong returns this year after even better returns last year. Further, while broad market indexes have been higher this year, they have been led by a thin group of large companies with many other US stocks lagging behind.
• Election jitters? It might be hard to believe before this month’s hiccups, but mid-term election years are typically quite volatile and often accompanied by only so-so returns before people vote. As November’s election creeps up we wouldn’t be surprised if volatility remains. In most mid-term election years, the president’s party gives up seats whether republican or democrat. While volatility spikes and returns are typically muted leading up to a mid-term election, stock investments have historically been quite good post-election. For more color on all of this, check out this insightful post from Capital Group on mid-term elections.
So, what’s an investor to do as they watch hard-earned results threatened by jittery markets?
• Stay focused on your time frame. Are you invested for immediate needs or for goals you have over time? This is very specific to you and your personal needs, but make sure that if you have long-term goals, you aren’t acting based on short-term reactions.
• Acknowledge your frustration. Don’t suppress the markets impact on your psyche until it boils over. Keep in mind that losses feel bigger than equivalent gains in most people’s minds. Talk through your frustration and reflect upon other instances when investments hit the skids and the longer-term impact on your investment results when you stuck with your plan.
• Are there parts of your portfolio that need attention? Perhaps you’re not appropriately diversified. When was the last time you re balanced? Have you loaded up on FANG stocks? If there’s a part of your investment strategy that is leaving you too exposed to risk or out in the cold not participating, there’s no time like the present to address your portfolio needs. All of this can be intimidating if you’re going it alone. Make sure to call in professionals if you aren’t comfortable managing by yourself by reaching out to your financial planner.
Any opinions are those of Melissa Joy, CFP®, CDFA® and not necessarily those of Raymond James. Past performance may not be indicative of future results.